Managerial Accounting GMBA 2015

Managerial Accounting
GMBA 2015

1. Introduction to management and cost accounting (sessions 1 and 2)
Question
Question
Question
Question

1
2
3
4

–
–
–
–

Metalex, Ltd.
Southern Sporting Company
Seaside Minerals
General Electric, Safeway and Google

2. Alternative cost accumulation systems (sessions 3 and 4)
Question 5 – North Winery, Ltd.
Question 6 – Industrial Company
3. Cost-volume-profit analysis (sessions 5 and 6)
Question 7 – WalkWear Company
Question 8 – Hamburg Concessions
4. Measuring relevant costs and revenues for decision-making (sessions 7 to 10)
Question
Question
Question
Question
Question
Question
Question
Question

9 – Gamex, Ltd.
10 – Gate Ltd.
11 – Plastex, Ltd. and Electomex, Ltd.
12 – OnlyBoats, Ltd.
13 – Even Ltd.
14 – PenínsulAIR
15 – Southwestern Company
16 – Maria Salvador, Ltd.

5. Product costing: issues and problems (sessions 11 and 12)
Question 17 – Movex, Corp.
Question 18 – Grimoak, Corp.
6. Activity-Based Costing (sessions 13 and 14)
Question 19 – Supermercado da Estrela
Question 20 – TekSound, Ltd.
Question 21 – Banco Lusitano

Managerial Accounting (GMBA)
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Question 1
The following information has been taken from the accounting records of Metalex, Ltd.:
Sales

1,350,000 €

Selling expenses

108,000 €

Purchases of raw materials (650,000 units)

325,000 €

Direct labour cost

341,000 €

Utilities (factory)

80,000 €

Depreciation (factory)

115,000 €

Insurance (factory)

10,000 €

Maintenance (factory)

55,000 €

Indirect labour

100,000 €

Administrative expenses

85,500 €

Financial expenses

57,500 €
Stocks

1 January

Raw materials

50,000 units x 0.45 €

Work in process

31 December
80,000 units

26,500 €

27,500 €

150,000 units x 2 €

Finish goods

130,000 units

Assuming production was 500,000 units and the company uses the LIFO method for valuing
movement of materials and finish goods:
1. Prepare a schedule of cost of goods manufactured;
2. Compute the cost of goods sold;
3. Prepare the profit and loss account.

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Question 2
Last year, Southern Sporting Company manufactured 100,000 units and reported the following
information (in Euros):
Sandpaper
Materials handling
Coolants & lubricants
Indirect manufacturing labour
Direct manufacturing labour
Direct materials, 1/Jan
Direct materials, 31/Dec
Finished goods, 1/Jan
Finished goods, 31/Dec
Work-in-process, 1/Jan
Work-in-process, 31/Dec

32,000
320,000
22,400
275,200
2,176,000
384,000
275,200
672,000
1,280,000
96,000
64,000

Leasing costs — plant
Depreciation — equipment
Property taxes — equipment
Fire insurance — equipment
Direct material purchases
Financial costs
Sales revenue
Sales commissions
Sales salaries
Advertising costs
Administration costs

Required:
1. What is cost of goods manufactured?
2. Prepare the profit and loss account.

3

384,000
224,000
32,000
20,000
3,136,000
25,000
12,800,000
640,000
572,000
480,000
800,000

Managerial Accounting (GMBA)
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Question 3
(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)

Seaside Minerals owns the rights to extract minerals from beach sands on Canary Islands. It has
costs in three areas:
a) Payment to a mining subcontractor who charges 80 € per ton of beach sand mined and
returned to the beach (after being processed to extract three minerals: ilmenite, rutile, and
zircon).
b) Payment of a government mining and environmental tax of 40 € per ton of beach sand
mined.
c) Payment to a barge operator. This operator charges 160,000 € per month to transport each
batch of beach sand – up to 100 tons per batch per day – to the mainland and then return
to Canary Islands (that is, 0 to 100 tons per day = 160,000€ per month; 101 to 200 tons
per day = 320,000€ per month, and so on).
Each barge operates 25 days per month. The 160,000€ monthly charge must be paid even if fewer
than 100 tons are transported on any day and even if Seaside Minerals requires fewer than 25 days
of barge transportation in that month. The company is currently mining 160 tons of beach sands
per day for 25 days per month.
Required:
1. What is the variable cost per ton of beach sand mined? What is the fixed cost per month?
2. Plot a graph of the variable costs and another graph of the fixed costs. Is the concept of
relevant range applicable to your graphs? Explain.
3. What is the unit cost per ton of beach sand mined
a. If 160 tons are mined each day?
b. If 230 tons are mined each day?
Explain the difference in the unit-cost figures.

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Question 4
(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)

Each of the following cost items pertains to one of these companies: General Electric (a
manufacturing-sector company), Safeway (a merchandise-sector company), and Google (a
service-sector company):
a) Perrier mineral water purchased by Safeway for sale to its customers;
b) Electricity used to provide lighting for assembly-line workers at a General Electric
refrigerator-assembly plant;
c) Depreciation on Google’s computer equipment used to update directories of Web sites;
d) Electricity used to provide lighting for Safeway’s store aisles;
e) Depreciation on General Electric’s computer equipment used for quality testing of
refrigerator components during the assembly process;
f)

Salaries of Safeway’s marketing personnel planning local-newspaper advertising campaigns;

g) Perrier mineral water purchased by Google for consumption by its software engineers;
h) Salaries of Google’s marketing personnel selling banner advertising.
Required:
1. Distinguish between manufacturing-, merchandising-, and service-sector companies;
2. Distinguish between inventoriable costs and period costs;
3. Classify each of the cost items (a-h) as an inventoriable or a period cost. Explain your
answers.

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Question 5
North Winery Ltd. commercialises wine bottles and has reported profit as follows (variable costing
bases):
€
Sales (@ 4 €)
Less: variable costs
Manufacturing costs
Selling and administrative costs
Total variable costs
Contribution margin
Less: fixed costs
Manufacturing costs
Selling and administrative costs
Total fixed costs
Net income

6,000,000
2,250,000
600,000
2,850,000
3,150.000
1,064,000
880,000
1,944,000
1,206,000

Assume there was no opening stock of wine and production was 1,520,000 bottles.
Required:
1. Prepare the profit and loss account using absorption costing.
2. Reconcile the absorption costing and the variable costing profit figures. Explain.

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Question 6
During the first two years of operations, a company reported profit as follows (absorption costing
basis):
Year 1
2,000,000 €
1,620,000 €
1,620,000 €
180,000 €
1,440,000 €
560,000 €
420,000 €
140,000 €

Sales (@ 50 €)
Opening stocks
Cost of goods manufactured (@ 36 €)
Goods available for sale
Less ending stocks
Cost of goods sold
Gross margin
Selling and administrative expenses*
Profit

Year 2
2,500,000
180,000
1,620,000
1,800,000
1,800,000
700,000
460,000
240,000

€
€
€
€
€
€
€
€

* Includes 4 € per unit variable and 260,000 € fixed costs each year.
The company’s 36 € unit product costing is computed as follows:
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
Unit product cost

8
14
2
12
36

€
€
€
€
€

Required:
1. Prepare the profit and loss account for each year in the contribution format using variable
costing.
2. Reconcile the absorption costing and the variable costing profit figures for each year.
3. Compute the break-even point and quote the assumptions on which cost-volume-profit
analysis is based.

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Question 7
(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)

Each WalkWear Company operates a chain of shoe stores that sell 10 different styles of
inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair of
shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a
fixed salary and a sales commission. WalkWear is considering opening another store and collected
the following information:
Unit variable data (per pair of shoes)
Selling price

Annual fixed costs

32.00 €

Rent
Salaries

Cost of shoes
Sales commission
Variable cost per unit

Advertising

22.00 €

Other fixed costs

2.00 €

Total fixed costs

24.00 €

60,000 €
204,000 €
82,000 €
26,000 €
372,000 €

Required:
1. What is the annual breakeven point in (a) units sold and (b) revenues?
2. If 37,000 units are sold, what will be the store’s operating income (loss)?
3. If sales commissions are discontinued and fixed salaries are raised by a total of 89,000€,
what would be the annual breakeven point in (a) units sold and (b) revenues?
4. [Refer to the original data] If, in addition to his fixed salary, the store manager is paid a
commission of 0.25€ per unit sold, what would be the annual breakeven point in (a) units
sold and (b) revenues?
5. [Refer to the original data] If, in addition to his fixed salary, the store manager is paid a
commission of 0.25€ per unit in excess of the breakeven point, what would be the store’s
operating income, if 50,000 units were sold?

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Question 8
Hamburg Concessions currently sells hot dogs. During a typical month, the stand reports a profit
of 9,000 € with sales of 50,000 €, fixed costs of 21,000 €, and variable costs of 0.64 € per hot dog.
Next year, the company plans to start selling nachos for 3 € per unit. Nachos will have a variable
cost of 0.72 € and new equipment and personnel to produce nachos will increase monthly fixed
costs by 8,880 €. Initial sales of nachos should total 5,000 units. Most of the nacho sales are
anticipated to come from current hot dog purchasers, therefore, monthly sales of hot dogs are
expected to decline to 22,500 €.
After the first year of nacho sales, the company president believes that hot dog sales will increase
to 40,500 € a month and nacho sales will increase to 9,000 units a month.
Required:
1. Determine the monthly breakeven sales in dollars before adding nachos.
2. Determine the monthly breakeven sales during the first year of nachos sales.

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Question 9
(Adapted from Horngren et al. (2012) – “Cost Accounting: A Managerial Emphasis”, 14th Edition, Pearson Global Edition)

Gamex Ltd., manufactures game systems. Gamex has decided to create and market a new system
with wireless controls and excellent video graphics. Gamex’s managers are thinking of calling this
system the Yew. Based on past experience they expect the total life cycle of the Yew to be four
years, with the design phase taking about a year.
They budget the following costs for the Yew:
Total fixed costs
over four years
Year 1
Years 2-4

R&D costs
Design costs
Production
Marketing & Distribution
Customer service

6,590,000
1,450,000
19,560,000
5,242,000
2,900,000

Variable cost
per unit
€
€
€
€
€

----50€ per unit
10€ per unit
---

Required:
1. Suppose the managers at Gamex price the Yew system at 110€ per unit. How many units do
they need to sell to break even?
2. The managers at Gamex are thinking of two alternative pricing strategies.
a. Sell the Yew at 110€ from the outset. At this price they expect to sell 1,500,000
units over its life-cycle.
b. Boost the selling price of the Yew in year 2 when it first comes out to 240€ per unit.
At this price they expect to sell 100,000 units in year 2. In year 3 and 4 drop the
price to 110€ per unit. The managers expect to sell 1,200,000 units in years 3 and 4.
Which pricing strategy would you recommend? Explain.
3. What other factors should Gamex consider in choosing its pricing strategy?

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Question 10
Gate Ltd., a manufacturer and distributor of mobile phones, knows that in order to achieve a 20
per cent share of the domestic market next year the selling price per unit for its standard product
should be set at 120 €. The company wishes to earn profit equal to 10 per cent of the sales. Unit
cost is anticipated to be 110 € next year.
Required:
1. What is the target cost per unit for Gate’s standard product?
2. Distinguish between target costing and kaizen costing.

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Question 11

A
For the next year Plastex Ltd. has capacity to make 60,000 units of its plastic product. The
variable cost of production is 4€ per unit. Fixed costs per annum are budgeted at 120,000€.
In the past prices have been set on a cost plus basis, with 25% being added to the full cost per
unit. Overheads being absorbed on the assumption of full capacity utilisation. As there is a
depressed market, it is now suggested that the market research survey would help to set a more
profitable price for the product.
The survey discloses the following:
Price per unit
€

Anticipated demand
units

6.50
7.00
7.50
8.00
8.50
9.00

68,000
55,000
46,000
40,000
28,000
------

Required:
1. If the cost plus 25% price were charged and the market survey proved reliable, what would
be the estimated profit for next year?
2. If the market survey proved reliable what would be the profit maximising price?

B
O Electromex, Ltd. wishes to capture 20% of the market for new type of heating equipment.
Market research has established that the selling price to achieve this volume is 375 € per unit.
Calculate the target cost for the new heating equipment, considering that the company’s target
profit margin for this type of product is 30%.

C
Explain both pricing strategies and discuss the difference between them.

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Question 12
OnlyBoats Ltd. has been asked to refit a boat for a customer. Skilled labour costing of 8 € per
hour will be required for the refit. The workers will have to be taken off from the production of
canoes for resale for a total of 240 hours. The canoes are sold for 240 € each and each take 12
hours of skilled labour. The cost card for canoes is as follows:
Cost per Canoe
Direct materials
Direct labour
Variable overheads
Fixed overheads
Total cost

40 €
96 €
20 €
60 €
216 €

What is the relevant cost of labour when assessing the viability of the refit contract?

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Question 13
Even Ltd. specialises in the production of white paint. It normally produces three types of white
paint, details as follows:
Gloss
3,000
275 €

Profit per drum
Processing hours per drum

Emulsion
5,000
225 €

Undercoat
4,000
150 €

185 €
55 €
240 €
35 €
5 hours

Expected demand next period (drums)
Selling price per drum
Cost per drum:
Variable costs
Allocated fixed costs

165 €
45 €
210 €
15 €
2.5 hours

100 €
30 €
130 €
20 €
2 hours

Fixed costs have been allocated to products on the assumption that full demand would be matched
by production, but due to machine breakdown, processing hours are limited to 30,000 hours for
the next period.
Assuming that any shortfall in supply of one product does not affect demand for the other products:
1. What are the expected profits, if the company decides to meet next period demand for Gloss
and Emulsion and sell no Undercoat?
2. What will be the contribution if the company chooses the product mix that will maximise its
profits?

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Question 14
PenínsulAIR operates scheduled commercial passenger flights between regional centres. The
company’s aircraft have three passenger classes: Club, Business and Economy. The available
landing slots mean that current passenger capacity is limited. The company has 16 aircrafts, each
of which carries 125 passengers. Each aircraft makes five flights per day. The average flight is 500
miles.
Key demand and cost data are set out below:
Club
Demand (passenger-miles per day)
Fares per passenger-mile
Variable costs per passenger mile

Business

1,000,000
0.90 €
0.38 €

3,500,000
0.60 €
0.22 €

Economy
2,000,000
0.50 €
0.10 €

Total
6,500,000
-----------

Fixed operating costs average 0.35 € per passenger-mile. How should the company arrange its
aircraft seating to maximise short-term profitability? Explain.

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Question 15
Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy
the motors from Jinx Motors for 1,250€ each. Southwestern’s plant can manufacture the
motors for the following costs per unit:
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total

500
350
1 00
350
1,300€

If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied
will not be avoided.
Required:
1.
Should the company make or buy the motors?
2.
What additional factors should Southwestern consider in deciding whether or not to
make or buy the motors?

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Question 16

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Question 17
This problem introduces the cost accounting system called “job-costing”. This system attempts to
(a) measure the direct costs of each order and (b) allocate the indirect costs on the basis of an
overhead rate.

Movex, Corp. produces furniture by order / contract and uses a job-order cost system. At the
beginning of January, they had order 397 in process, carrying the following costs from the previous
period:
Raw materials
Direct labour
Overheads

80,000 €
40,000 €
20,000 €

The company applies overhead cost to jobs on the basis of direct labour hours worked. For the year
just started, management estimated that it would work 150,000 labour hours and incur about
1,800,000 € in manufacturing overhead costs.
In January, the following events took place:
1. Order 397 was finished, using additional 50,000 € of direct materials, and 25,000 € of direct
labour (3,125 hours). Order 397 was sold for 300,000 €.
2. Order 401 was started and finished. 150,000 € of raw materials, and 44,000 € (5,500
hours) of direct labour were used for that order. Order 401 was sold for 350,000 €.
3. Order 402 was started. 48,000 € of direct labour (6,000 hours), and 120,000 € of raw
materials were used for that order, which was not finished at the end of the month.
4. Overhead costs incurred during the month were:
Indirect materials
Indirect labour
Depreciation
Utilities

12,000
25,000
90,000
48,000

€
€
€
€

5. Selling and administrative expenses were 57,500 €.
Required:
1. Compute the cost of each order;
2. Prepare a profit and loss account for January.

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Two possibilities arise with respect to calculating the absorption rate – doing it a priori or a
posteriori.
If it is done a posteriori, that is, according to actual data, then this means that either the time
period chosen for this purpose is short (such as a week or month), in which case the overhead rate
will be constantly fluctuating (especially if the business is seasonal), or else that the period is
relatively long (such as a year), and then one must wait until December to be able to calculate the
full cost of all production orders, even those which were finished in January.
As a result, in practice, a predetermined or standard rate is used. This rate is established at the
beginning of the year based on data taken from experience, with whatever modifications are
expected for the coming year. All orders are debited overhead at this rate until the end of the year,
when the actual total amount of overhead is known. This total will not agree with the amount of
overhead allocated to products except by chance; although it is hoped, provided the rate used is
calculated based on reasonable expectations, that the difference will not be too great.



Over-absorption (or over-applied) overhead if the overhead which has been absorbed is
greater than the real overhead;
Under-absorption (or under-applied) overhead if the reverse is true.

Two reasons:
Actual overhead expenditure not as budget;
Actual activity levels not as budget.

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Question 18
A manufacturing business, Grimoak, Corp., organises its production into four cost centres. Last
month the company produced 60,000 items of product. Further details of the costs are included in
the following table:
Cost centre
Machining
Assembly & finishing
Packaging
Maintenance & repairs
Total

Production overhead
(excluding the factory rental)
291,975 €
130,305 €
116,140 €
68,965 €
607,385 €

Floor area
1,500
1,700
1,600
2,100
6,900

sq.
sq.
sq.
sq.
sq.

m.
m.
m.
m.
m.

Maintenance & repairs is a service cost centre that has worked 6,000 LH to Machining, 3,400 LH to
Assembly & finishing and 5,800 LH to Packaging.
Required:
1. Using the floor area as base of apportionment, compute the cost of the factory rental
(23,115 €) of each cost centre.
2. Calculate the overhead absorption rate for each department on the following basis:
a. Machining
machine time
120,000 MH
b. Assembly & Finishing direct labour hours
30,000 LH
c. Packaging
units of production
60,000 items
d. Maintenance & Repairs direct labour hours
15,200 LH
3. The prime cost and timing details for one unit of production are:
€
Materials
Direct labour
Prime cost (or direct cost)

16.20
19.00
35.20

Each unit uses 2 hours of machine time in the machining department.
Each unit uses 0.5 direct labour hours in the assembly and finishing department.
Calculate the total production cost for one unit of the company’s product.

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Question 19
Supermercado da Estrela has decided to increase the size of its store. It wants information about the
profitability of individual product lines: soft drinks, fresh produce, and packaged food.
Soft drinks

Fresh produce

Packaged food

Revenues (€)

317,400

840,240

483,960

Cost of goods sold (€)
Cost of bottles returned (€)
Number of purchase orders placed
Number of deliveries received
Hours of self-stocking time
Items sold

240,000
4,800
144
120
216
50,400

600,000
0
336
876
2,160
441,600

360,000
0
144
264
1,080
122,400

Additional information for the current year:
Activity

Bottle returns
Ordering
Delivery
Shelf-stocking
Customer support

Description of activity

Total
costs

Returning of empty bottles to store
Placing orders for purchases
Physical delivery and receipt of merchandise
Stocking of merchandise on store shelves
Assistance provided to customers (i.e. checkout, bagging...)

Cost-allocation base

4,800
62,400
100,800
69,120
122,880
360,000

Direct tracing to soft-drink line
624 purchase orders
1,260 deliveries
3,456 hours of shelf-stocking time
614,400 items sold

Required:
1.
2.
3.

The supermarket currently allocates store support costs to product lines on the basis of cost of
goods sold of each product line. Calculate the operating income as a percentage of revenues for
each product line.
If they use an ABC system, calculate the operating income as a percentage of revenues for each
product line.
Comment on your answers above.

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Question 20
TekSound, Ltd. makes two products, a radio with a built-in tape player and one with a built-in
compact disc (CD) player. For the current year, TekSound has budgets sales of 50,000 CD units
and 200,000 tape units. All production is sold to auto manufacturers for installation in new cars and
trucks.
Direct costs:
CD unit

Tape unit

Direct materials

90 €

50 €

Direct labour* (10 € per direct labour hour)

20 €

20 €

*Both products require two labour hours to complete, therefore the company plans to work 500,000 hours.

Total manufacturing overhead costs for the current year are estimated to be 10,000,000 €.
Required:
1. Compute the unitary product cost, assuming the company allocates overheads based on
labour-hours.
2. The ABC project team has developed the following basic information:
Expected activity

Estimated

Activity e cost drivers

overhead

CD

cost

Tape

Total

Material receipts (receipts)

2,000,000 €

1,800

3,200

5,000

Machine setups (setups)

2,600,000 €

3,000

1,000

4,000

Production orders (orders)

900,000 €

400

800

1,200

Product testing (tests)

3,400,000 €

16,000

4,000

20,000

Machine related tasks (machine hours)

1,100,000 €

300,000

700,000

1,000,000

Compute the unitary product cost, using activity-based costing. Comment the results.
3. Evaluate the benefits and limitations of activity-based costing.

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Question 21
Banco Lusitano is examining the profitability of its premier...